Turkey: Turkey's New Petroleum Law

Turkey enacted a new Petroleum Law in June to help attract
international investment in its offshore oil and gas resources in
the manner currently being experienced in neighbouring Cyprus,
Israel and Lebanon. Nina Howell, counsel in King &
Spalding's London office, discusses the new law amid growing
interest in the east Mediterranean.

The Levant Basin, a deep marine basin in the east Mediterranean
between Cyprus, Israel, Lebanon and the Palestinian Territories,
has historically been overlooked as an area for hydrocarbons. But
recent gas discoveries in the region have changed that perception,
and interest among gas players is growing. In 2010 the US
Geological Survey suggested that the basin may hold up to 3.5
trillion cubic metres of natural gas.

Update on the east Mediterranean

Israel

In May, Noble Energy unveiled a natural gas discovery at the
Karish prospect in Israel, with estimated gross resources of
between 1.6 and 2 trillion cubic feet (Tcf ).

Israel has already seen discoveries in the Leviathan and Tamar
fields in recent years. These discoveries led the government of
Israel to review its hydrocarbons laws and publish new regulations
and guidelines in 2010 and 2011. The new regulations enhance the
legal regime under the Petroleum Act 1952 relating to exploration
and production, marketing and distribution of oil and gas and
taxation of hydrocarbons.

Lebanon

Lebanon opened its first international tender for offshore gas
exploration in 2013. Gebran Bassil, Lebanon's energy minister,
has predicted gas reserves of up to 30 Tcf in Lebanon's
territorial waters. Exxon Mobil, Chevron, and the National Iranian
Drilling Corporation are among the 52 international energy
companies submitting applications to participate in the first
offshore gas round.

In anticipation of the opening up its hydrocarbons sector to
foreign investment, Lebanon introduced the Offshore Petroleum
Resources Law and Petroleum Activities Regulations in 2010. Amongst
other things, the new law introduced a new petroleum administration
body and allowed the Lebanese government to issue licences to any
joint stock company wishing to partake in petroleum activities,
subject to entering into an exploration and production agreement
with the government.

Cyprus

In Cyprus, Noble Energy also discovered large gas reserves in
Block 12 in late 2011 under a production-sharing contract (PSC)
awarded under the Cypriot government's first licensing round.
Noble and its partners in Block 12 propose to develop an LNG plant,
which will be the first LNG export project in the EU, to monetise
gas produced in Block 12

As an EU member state, Cyprus is subject to EU laws applying to
the hydrocarbons sector. Although the domestic oil and gas laws of
Cyprus provide an overarching legal and regulatory framework, a
substantial amount of detail is likely to be required for Cyprus to
develop as an exporter of hydrocarbons.

Earlier this year the Cypriot government also concluded its
second licensing round. After successful negotiations with the
Council of Ministers, a consortium between Italy's Eni and
Korea's Kogas signed three PSCs (in relation to Blocks 2, 3 and
9) offshore Cyprus, and Total signed two PSCs (in relation to
Blocks 10 and 11). The PSCs are based on a new model form
production-sharing contract published by the Cypriot government in
2012.

It is no surprise that expectations for discovery – and
ultimately export – are growing. The potential to provide the
EU with a stable energy supply is an attractive proposition and
could hand the east Mediterranean countries billions of dollars in
revenue, which in the case of Cyprus in particular would be a major
boost to its economy.

Turkey's approach

As a result of the discoveries, competition among these east
Mediterranean neighbours to become the latest regional energy hub
has suddenly intensified. This scenario has given one of the
Mediterranean's main emerging economic powers, Turkey, reason
to review its own approach to the regional oil and gas market.

On a political level, tensions still remain between Turkey and
its neighbours, especially in relation to the sovereignty of
Cyprus. There have already been skirmishes between the Turkish and
Cypriot governments over the locations of drilling. On a practical
level though, Turkey desperately needs to increase domestic
production and reduce its dependence on imports.

According to the International Energy Association, Turkey
produced just 44,900 barrels per day of oil against a demand of
670,300 barrels per day in 2012; an import dependency rate of 93.3
per cent.

The situation with natural gas is even worse with just 632
million cubic metres per year of production against 45 billion
cubic metres per year of demand; a 98.6 per cent dependency
rate.

Turkey, however, remains pivotal for the international gas
market despite its lack of domestic production. The country is the
meeting point for Russian and Middle Eastern resources and the key
European wholesale markets. It is a hub for key pipelines, notably
the Blue Stream gas pipeline from Russia, the Baku-Tbilisi-Ceyhan
oil pipeline from Azerbaijan and the Kirkuk-Ceyhan oil pipeline
from Iraq.

The Turkish government, largely in response to the recent large
gas discoveries in neighbouring Israel and Cyprus, has stated it
plans to increase exploration in its territorial waters. The
government recognised that the previous Petroleum Law 1954 was
perceived to pose a number of obstacles to foreign investment and
would need to be updated in order to attract investment from
outside Turkey.

Indeed, the current Turkish government, led by the Justice and
Development Party, attempted to overhaul the law with new
legislation in 2007, but certain provisions proved controversial so
it was ultimately vetoed.

However, a new draft Petroleum Law was presented to the Turkish
parliament for approval on 21 December 2012. It was adopted by the
Parliamentary Commission on Industry, Trade, Energy, Natural
Resources and Information Technology in March 2013 and was
officially passed into law on 11 June.

Turkey's new Petroleum Law

The new legislation aims to remove the hurdles to attracting
foreign investment. The old system that separated the country into
18 differing geographical regions has been replaced by a much
simpler onshore and offshore regime, with the latter sub-divided
into territorial and non-territorial waters.

The preferential rights of the national oil company, Turkish
Petroleum Corporation (TPAO), under the 1954 Petroleum Law have
been removed. TPAO will now compete in future licensing rounds on
the same terms as other companies, thereby leveling the playing
field for foreign investors. The change also paves the way for TPAO
to be privatised.

While Turkey has historically welcomed international entrants,
only a limited amount of the majors have so far invested
substantially in the country. Last year, for example, TPAO
teamed-up with Shell to begin exploring for shale gas. TPAO has
also entered joint undertakings in Turkey with other foreign
entities, such as NV Turkse Perenco, Thrace Basin Natural Gas
Corporation, Amity Oil International and Foinavon Energy.

The Turkish government has also made the permit and licensing
regime more attractive. Companies can now be issued with a
"search permit" to collect geological and geophysical
data. The search companies will be able sell the data collected
under the permit to interested parties for a period of eight years.
Multiples search permits can be issued for a single field.

Exploration licences can be granted for up to 56,000 hectares
for onshore and territorial waters and 1 million hectares for
non-territorial waters. The Turkish government has also increased
the duration of a licence. Onshore licences are now granted for
five years (rather than four) and eight years (rather than six) for
territorial waters. These licences can be extended by two and three
years respectively.

Operation licences of 20 years will be issued if petroleum is
discovered during the exploration phase. These can be extended by a
further 10 years on two further occasions. Between 35 per cent
(onshore) and 45 per cent (offshore) of the petroleum produced can
be exported.

The new Petroleum Law seeks to prevent companies acquiring
licences solely for the potential to sell on without making an
investment in exploration activities. It requires an applicant for
an exploration licence to provide a bond equal to 2 per cent of the
financial commitment in the work plan in the licence application. A
reduced rate of 1 percent applies to offshore exploration where the
financial investment is expected to be higher. The requirement to
post a bond is intended to ensure that only investors with the
requisite financial and technical capability apply for exploration
licences.

There are also fiscal incentives for investors. The new
Petroleum Law reduces the ceiling for income tax from 55 per cent
to 40 per cent. In addition, companies are exempt from customs
duty, levies and stamp tax for equipment imported and supplied
locally. Barriers on repatriation of registered capital have also
been removed.

Under the new Petroleum Law, the government's share in oil
and gas payable as a royalty (in cash or in kind), remains
unchanged at 12.5 per cent. The government of Turkey considers it
to be a reasonable "take" and comparable to other
oil-producing countries. Some commentators have remarked that
lowering the government share could provide a further incentive to
foreign investors.

However, the calculation of the royalty has changed. The old
regime was based on the well head price (i.e. the unregulated
wholesale price at the point of production).

For oil, the new law states that the calculation shall be based
on the market price of domestic crude petroleum per barrel, as
arranged in article 10 of the Petroleum Market Law (the law was
dated 4 December 2003 and numbered 5015) for crude petroleum
produced on the basis of one petroleum unit.

In terms of natural gas, the calculation is based on the selling
price to distribution companies.

Finally, the new Petroleum Law is intended to bring Turkey's
petroleum regulation in line with EU Law. Turkey is a candidate for
full membership in the EU, although discussions regarding
Turkey's accession have been beset by a number of domestic and
external problems.

In 2007, Turkey stated its intent to comply with EU law by 2013.
The new Petroleum Law aims to harmonise Turkey's petroleum
legislation with EU laws in order to help facilitate Turkey's
accession.

This article was first published in the Global Energy
Review online news, 6 August 2013.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
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